For a Monetary Policy that is Independent, yet Subject to Rules

Abstract

Dietmar Kath gives an excellent digest of the arguments in favor of an independent central bank exercising its responsibilities without being subject to direction by government. Taking the Deutsche Bundesbank as an example he then points out deficiencies in the extent of its autonomy, for instance with respect to international currency agreements and in connection with monetary union between the two German states before reunification. However, intolerably high inflation in Germany — which is the concern of all those who, like Dietmar Kath, favor a central bank with unrestricted autonomy — did not result from this event. In the run-up to European Monetary Union, which is due to come into force in 1999, Kath pleads for a future European Central Bank which will have a greater degree of independence than the Deutsche Bundesbank currently has. He argues his case above all on the basis of the theories of Public Choice and of Institutional Economics. Both of these concepts are able to offer interpretations of the actions of bureaucracies; but to the analysis of developments in the economy as a whole they scarcely make any useful direct contribution. This requires macroeconomic paradigms. And so this article, on the basis of Keynesian elements of macroeconomics such as sluggish price adjustment and incomplete information, pleads for a future European Central Bank with conditional independence, which will be required to pay due regard not only to monetary stability but also to economic growth and employment.